The year 2009 was a landmark year for taxation in India [ Images ]. During this year, the government introduced a landmark Bill -- The Direct Taxes Code Bill. It remains to be seen if the finance minister speaks further on the code during his Budget speech on February 26, 2010.

If and when it is implemented, it will affect all of us as it will not only alter the tax we pay, but will also impact our investments, borrowings, and expenses.

Here is how it will affect all of us:

Changes in tax slabs

The biggest impact of the new tax system is the significant widening of income slabs. According to this, people with annual income not exceeding 1.6 lakh (Rs 160,000) will not have to pay any tax. For those with an annual income from Rs 1.6 lakh to Rs 10 lakh (Rs 1 million), you pay tax at 10%; for incomes from Rs 10 lakh to Rs 25 lakh (Rs 2.5 million), the tax is 20%, and it is 30% for incomes exceeding Rs 25 lakh.

So if your annual income is Rs. 2 lakh (Rs 200,000), you fall in the 10% tax slab. These rates and slabs would be applicable from the financial year 2011-12.

However, with this move the government plans to make most of your allowances taxable. Hence if you are a high earner, earning a lot of allowances, your tax liability will go up significantly.

Effect on Capital Gains

As per the new tax code, both the short-term and long-term capital gains are treated equally.

The tax code recommends making both the contribution and return from your investments tax-free, but proposes to tax the maturity proceeds. This will affect your stocks and equity mutual funds. This is different from the present system, in which the maturity proceeds are tax-free.

Impact on tax savings

With the introduction of this code, the government has eliminated the various tax breaks. However the government has hiked the tax savings limit to Rs 3 lakh (Rs 300,000) per annum, while restricting the available investment alternatives.

So now you can invest only in PPF (Public Provident Fund), EPF (Employees Provident Fund), life insurance, superannuation funds, and NPS (New Pension Scheme). Besides you can also claim tax benefits on your children's education.

However, the code proposes that there will be no more tax benefits for investing in NSCs (National Savings Certificates), Senior Citizens Savings Scheme, tax-saving bank fixed deposits and ELSS (Equity-Linked Savings Schemes).

Impact on home loans

Currently, if you have taken a home loan, the interest payments up to Rs 1.5 lakh (Rs 150,000) and up to Rs 1 lakh (Rs 100,000) towards principal repayment are eligible for tax benefit.

But this is set to end once the new code comes into effect. So if you have paid Rs 3 lakh as interest and Rs 2 lakh as principal, you will not get any tax benefit. However, if you have rented out a home, you can still avail of the tax benefits for taking the home loan.

The exemptions allowed

With the code, the government aims to tax the maturity proceeds of PPF and insurance. But in the case of insurance, deduction will be given only for the sum obtained only if the premium payable is not more than 5% of the sum assured and the sum assured is obtained only when the insurance term is over.

For PPF, the balance in the account as of March 31, 2010 will not be taxed on withdrawal.

Here is a simple example to help figure the effect of the new tax code:

Rahul is a salaried employee. His annual salary is Rs 5 lakh (Rs 500,000). He has invested Rs 50,000 in mutual funds, Rs 20,000 in insurance and Rs 40,000 in PPF.

Moreover he has taken a home loan of which he has already paid Rs 80,000 as principal and Rs 1 lakh as interest.

Let us see how his situation will change once the new tax code comes into effect.

Rahul's current situation: Currently Rahul gets tax benefit on the amounts he has invested in PPF, mutual funds, insurance as well as on the principal repayment of his home loan. The limit on this amount is Rs 1 lakh.

Besides, Rahul has also paid interest on his home loan. So the total amount tax exempted is Rs 2 lakh (Rs 1 lakh tax exemption under Section 80C of the Income Tax Act and Rs 1 lakh as interest on home loan).

Hence now Rahul's taxable amount is Rs 3 lakh -- (Rs 5 lakh of salary minus Rs. 2 lakh of amount exempted). So the total tax that Rahul will pay on the amount of Rs 3 lakh is Rs 15,000 [Rs 3 lakh - Rs 1.5 lakh = Rs. 1.5 lakh is the taxable amount and the tax rate applicable is 10%]. So he currently pays Rs 15,000 as tax.